As my long-time readers know, contrarian investing is all about buying when others are selling and selling when others are buying. Getting in ahead of the crowd is the key to successful long-term investing.
One market segment that has been severely hit over the past few months and could be ripe for long-term investing is the international potash market. Two firms operating out of Russia and Belarus essentially control approximately 40% of the potash market through a cartel that dictates supply and, ultimately, pricing.
In July of this year, this cartel collapsed, with one of the firms changing their strategy to maximize volume. This caused potash prices to drop by approximately 33%.
I believe there is a long-term investing opportunity in the international potash market. The current squabble between these two firms really is a soap opera, involving egos and politics centered between former Soviet Union nations.
For long-term investing purposes, one has to envision what’s likely to occur over the next few years. I don’t believe that management and the political leaders of both Russia and Belarus want to see potash prices at such low levels when they are able to reduce supply and raise prices.
This creates an investment opportunity for domestic potash producers.
While the overall stock market has soared, potash companies have seen their share prices drop significantly. For long-term investing purposes, I believe this is creating an attractive investment opportunity.
When it comes to long-term investing in a sector that’s beaten up, I would suggest looking at the market leaders, since they have the cash on hand to weather the storm.
Potash Corporation of Saskatchewan Inc. (NYSE/POT, TSX/POT) is one of the top potash firms in the world. With a market capitalization of $27.0 billion, a forward dividend yield of approximately 4.5%, and a return on equity of over 20%, even with the collapse in potash prices, this company is certainly one worth considering for long-term investing.
But remember, an unloved sector can remain out of favor for some time. The investment opportunity might certainly be valid, but this is the type of situation where investors need to slowly enter a market sector over a long period of time.
Chart courtesy of www.StockCharts.com
As you can see in the chart above, the collapse of the cartel in July 2013 caused a massive sell-off in the stock. With the stock now trading near lows not seen since 2010, the stock might soon be a candidate for long-term investing. Obviously, there are still several structural issues that need to be fixed.
While the investment opportunity is definitely present in the potash sector, one simply can’t put all their eggs in one basket. Long-term investing when there are so many unknowns can be risky; one needs to exercise caution by having a diversified portfolio, even within a given sector.
When will the Russian/Belarus potash cartel be formed once again? Who knows, as politics and business are extremely difficult to predict. In my opinion, it just makes business sense to have the price of potash increase, benefiting both nations and all companies in this sector.
Fundamentally, the demand for food, in my opinion, won’t decline anytime soon. Last time I checked, the population continues to grow, and this means more mouths to feed. The investment opportunity in food is pretty clear. More demand means a greater yield per acre is needed, which is why farmers use fertilizers in the first place.
Long-term investing in the potash sector is attractive from several different viewpoints. The cheaper valuations for potash companies, the investment opportunity from increased demand from food, and the cartel being renewed by two of the largest producers in the world are all positive catalysts.
This is not a short-term trade, which means it could take some time for this investment opportunity to work itself out. However, in my opinion, long-term investing in the potash sector is beginning to look more attractive. I would certainly have these stocks on my watch list for further consideration and due diligence.
This article Undervalued Opportunity Ripe for Long-Term Investing was originally published at Investment Contrarians